ACC 326 Study Guide - Midterm Guide: Futures Contract, Tax Deduction, Employee Stock Option

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31 May 2017
- Positives: derivatives allow for a reduction of risk through hedging
- Negatives: risk can increase by using derivatives
- Recognize derivatives to:
oI/S if tis FV hedge
oComprehensive Income if its CF hedge
oI/S if its not a hedge
- If a derivative is not a hedge, value at FV on the B/S and gain loss on I/S
- If it’s a FV hedge  derivative at FV on BS and changes in FV on the IS OR Mark corresponding
item being hedged to FV and changes in FV on the IS
- If it’s a CF hedge  do the derivative at FV on the balance sheet and changes in FV in
comprehensive income
- Accounting:
1. Record at fair value
2. Gains and losses accounted for as derivative, recognized in current earnings and switch the
inventory from cost to FV
- Put options put floors on what they can lose in regards to the sales price
- Do not tax event until the position is liquidated
Income Tax Expense
- When we sell
Income Tax Payable
- Record derivative at fair value and report gain/loss in other comprehensive income
- Eneter a futures contract to lock in the price of a good
- If the hedge is effective then it is between the 80-125% range
- Anticipates transaction cannot have a FV hedge
- Firm Commitment cannot have CF hedge
Compound Financial Instruments
1. Callable Deby
2. Reedemable Debt
3. Convertible Debt
4. Debt with non-detachable warrants
5. Convertible debt with cash settlement option
6. Debt with detachable warrants
- 1-4 don’t bifurcate; 5 and 6 must be bifurcated
- 5 does HCA while 6 can do HCA or FV Option on Debt
Stock Based Compensation
- Stock based comp is awarded at FV in either restricted stock units OR stock options
- We use straight line in this class
- If itsequity settled then it goes to equity and do FV of grant
oIncentive stock options do not tax the employee
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